Spooky Emerging Market Update

This year the Jack-o-Lantern that I carved here at our house has two faces.

One reminds us that stock markets can rise, but…

The other face reminds us that they can also go down.

At times… at their darkest hours the stock markets can seem…

confusing. We, the investors,… at times like this… can feel like we are stabbing in the dark.

The old adage “Buy on the rumor… sell on the news” is true… for traders. This is why most of us should traders be not!

If one follows the global news, think about this spooky stock market thought.

Last month, (September 2012) a Financial Times article entitled “Malaysian plans defy global downturn” by Jeremy Grant says: Using the soaring rhetoric of nation-building on a grand scale, Najib Razak, the Malaysian prime minister, recently snipped a ribbon to inaugurate construction of a 28-hectare site in Kuala Lumpur destined to be a new financial centre.

With much of the world economy experiencing anaemic growth at best, it is hard to believe that any country would contemplate a project on this scale.

Yet Malaysia’s economy is enjoying a gravity-defying boom that is confounding sceptics. Second-quarter gross domestic product figures out this week showed the economy grew by 5.4 per cent, way above consensus expectations of 4.6 per cent, and the 4.9 per cent recorded – after an upward revision – for the previous quarter.

Malaysia’s stock market has been among the best performers in the world, buoyed by big flotations including Felda, a state-controlled palm oil producer, which was the second-largest initial public offering after Facebook when it raised over $2bn last month.

Bankers are cashing in with a parade of further IPOs expected within months, including Karex Industries, a Malaysian company that makes condoms.

Much of the impetus behind the growth comes from an “economic transformation programme” initiated by Mr Najib when he came to power in 2009. This involves dozens of government-backed projects designed to boost per capita income to $15,500 by 2020, from $9,600 last year and lift Malaysia out of its “middle-income trap”.

That same month (September 2012) another FT article “Egypt’s deficit hits 11% of GDP” by Heba Saleh in Cairo told of an Egyptian economic crisis.

The article said: Egypt’s budget deficit reached 11 per cent of gross domestic product for the fiscal year ending in June, far higher than the 8.6 per cent originally forecast, the Egyptian finance ministry announced on Tuesday.

Mumtaz al-Saeed, the finance minister, attributed the rise to public sector salary increases and a drop in tax revenues because of faltering economic activity during the 18 months of political turbulence since the revolt which toppled Hosni Mubarak as president.

Labour action had also deterred foreign investment and reduced tourist numbers, he said in a statement on his ministry’s website.

In an unusual assertion for a minister who generally shunned the press, he was quoted as saying that he was “keen to reveal the truth about the economic situation however negative it is, or however shocking some may find it”.

The paper quoted an unnamed oil ministry official as saying the government owed $6bn to international oil companies and that it was able to meet only half the required $100m in weekly payments for its purchases of petroleum products.

Yet in the third quarter of 2012, what was one of the worst performing emerging market? What was the best? You can guess. See below how the Egyptian stock index rocketed up 23.3% and how Malaysia was one of the worst.

This is why once a quarter we look at the emerging equity market valuation analysis by Michael Keppler. Michael’s firms are the best when it comes to value analysis of stock markets.

Here is an update on the values of major stock markets by Keppler Asset Management.

In the third quarter, Emerging Markets equities basically recovered what they lost in the second quarter. The Morgan Stanley Capital International (MSCI) Emerging Markets Total Return Index (December 1988 = 100) gained 5.9 % in local currencies, 7.7 % in US dollars and 6.3 % in Euros.

After declining 4.7 % versus the US dollar in the second quarter 2012, the Euro regained 1.4 % in the third quarter. It now stands at 1.2865 (USD/EUR) compared to 1.2982 at year-end 2011.

All three regional indices advanced last quarter: Asia by 6.5 %, Europe, Middle East and Africa (EMEA) by 7.2 % and Latin America by 3.5 %.

Performance numbers are in local currencies unless mentioned otherwise.

Nineteen Emerging Markets advanced last quarter and two markets declined.

Egypt – the only market with a double-digit return – skyrocketed a whopping 23.3 % in the third quarter.

Indonesia was the second best market with a total return of 9.5 % followed by India which advanced 9.0 %.

According to our performance ratings, a combination of these markets offers the highest expectation of long-term risk-adjusted performance.

The following table shows how the Emerging Markets Top Value Model Portfolio compares to the MSCI Emerging Markets Index at the end of September 2012 based on selected asset and earnings valuation measures:

Neutral Markets are Morocco, Peru, South Africa, Thailand.

Poor value markets are: Chile, India, Indonesia, Mexico, Philippines.

Here is a better adage than “buy on the rumor, sell on the news”. “Ignore the rumors and news. Seek value instead!“

Gary

Get equity market value updates and learn about how to invest in value markets at our February 1-2-3 Super Thinking + Investing & Business seminar.